Expansionary monetary policy causes recessions

Imagine a large flat piece of land out West. If a series of rivers run through this land for millions of years, it will create a series of canyons. In order to cross this land, hikers have to trudge up and down, up and down. Not good.

Instead assume that a set of giant piles of rock are dumped on this flat land, creating a series of mountains. Hikers must climb up and down these mountains to cross the land. Not good.

Suppose you start with a stable monetary policy, and no business cycles. They you start doing tight money every few years, creating a boom and bust cycle in the economy. Not good.

Or, suppose you start with a stable monetary policy, and then do a highly expansionary policy every few years. Once again, you create a series of business cycles, booms and recessions. Not good.

Many people understand that contractionary monetary policies can create business cycles, but far fewer understand that expansionary monetary policies are equally likely to create business cycles. (Austrians get it.)

The optimal is roughly 4% growth in NGDP, year after year.

I’m currently not all that worried about the economy overheating, but not because I don’t think it would be all that bad if it did. It would be very bad if the economy overheated, likely creating a recession soon after.

So don’t listen to people making arguments that were already discredited in 1968, that is, people claiming that overheating wouldn’t be that bad because it would help workers to find jobs. The actual risk of an overly expansionary monetary policy is that it would cause a subsequent recession.

Back to geology. You don’t want northern Arizona. You don’t want central Colorado. You want Kansas.

The Fed’s gradually building credibility behind it’s 2% AIT. Keep up the good work!!

Cat People is a horror film

I’m referring to the classic 1942 version, directed by Jacques Tourneur and produced by Val Lewton.

But as explained in Reason magazine, it’s nowhere near as horrifying as this cat:

Read it and weep. Just one more sad casualty in the War on Drugs.

Liberalism’s darkest decade

Perhaps you are a boomer, currently outraged that millennials seem unable to understand that it’s not OK to sign a petition to have your boss fire one of your colleagues. You wonder what’s wrong with the younger generation. Have they no sense of basic human decency?

Or perhaps you are a member of the Greatest Generation, who were appalled that the young boomers reacted to all their sacrifices (WWII) and accomplishments (1960s prosperity) by becoming a bunch of drug addled hippies who rejected conventional morality.

But no generation was betrayed worse than the liberals of the late 19th century. In a period of 7 short years, a supposedly “liberal” president presided over the most appalling string of policy outrages in US history. Here are just some of the highlights:

1. In 1913, Wilson issued an order segregating the federal government. This was done so that whites would not have to suffer the supposed “indignity” of working next to blacks.

2. In 1913, Wilson signed the first income tax. At first, the tax was not that unreasonable. Most people didn’t have to pay any tax. The upper middle class and rich paid a 1% income tax, while the super rich paid 7%. But in the long run it became a monstrosity.

3. In 1913, Wilson signed the Federal Reserve Act, creating an institution with power to influence monetary policy but lacking the skill to do so wisely. The Fed played a major role in causing the Great Depression, which led directly to the success of the Nazis in Germany.

4. In 1914, Wilson signed the Harrison Act, which regulated (and later banned) narcotics. This led the the horrific War on Drugs, which has destroyed so many lives, and even entire countries.

5. In 1916, NYC enacted the nation’s first citywide zoning laws. The early rules (for things like setbacks) didn’t do much harm, but as with the income tax these laws eventually became very destructive.

6. In 1917, the US entered WWI. This tipped the balance against Germany, assuring that the most powerful country in Europe would lose the war. That made a rematch almost inevitable. Thus both the creation of the Fed and the US decision to enter WWI indirectly contributed to WWII and the Holocaust.

7. In 1917 and 1918, Wilson signed a series of laws that made it a crime to criticize the US decision to enter WWI. Free speech was effectively dead for the duration of the war.

8. To his credit, Wilson vetoed the Volstead Act in 1919, a law banning the sale of alcohol, but only because he objected to one narrow provision. It passed over his veto.

Some progressives might raise an eyebrow over my Fed and income tax views. To be clear, I’m not in the “Abolish the Fed” camp. The Fed we have today was basically created in 1935. The original Fed was a disaster, presiding over (and helping to cause) both the most unstable 20 years of monetary policy in US history and the worst banking crises. It was an utter failure. (Even the revised Fed has made serious mistakes, but it’s gradually learning from its errors.)

As far as the income tax, most of the harm done is not from the work disincentives (I favor a progressive consumption tax, which has basically identical work disincentives.) It’s not even the bias against future consumption (which hurts high savers like me.) Rather the biggest problems are the distortions it creates, the things people do to avoid paying taxes.

Thus the income tax deduction for health insurance has played a major role in pushing US spending on health care from 5% to 18% of GDP. And that plays a major role in reducing growth in our living standards.

Most people have a “follow the money” approach to economic analysis, whereas you actually want to follow the output. All the labor and materials going into that wasted 13% of GDP (above Singapore’s 5% of GDP) could have been used to provide average Americans with better housing, nicer cars, more restaurant meals and more trips to Disney World. Because we produce lots of medical goods that don’t make us happier, our living standards suffer.

As Noah Smith recently point out; it’s not so much about the money as it is about what we produce, and the ways in which we are making that production excessively costly. The income tax is far from the only problem, but its a big one. We should have a progressive consumption tax.

Progressives are feeling their oats right now, and I can’t blame them after the Trump fiasco. But this is the party that repealed a luxury tax a few decades back because they worried it was reducing output in the yacht making industry. (No, I’m not joking.) This is the party that at a local level often wants to stop big bad housing developers from building houses. Good intentions are not enough. If you don’t understand EC101, you aren’t going to be able to help anyone.

Great stuff

Brought a tear to my eye:

People keep asking why I won’t give up on my obsession with Trump. Here’s Matt Yglesias:

And if you want to know why Yglesias is one of the best tweeters, these 4 tweets also appeared right before the one I cited.

Pseudo-Twitter post

1. Peter Navarro claims that Trump is almost unbelievably incompetent when picking advisors:

Former President Donald Trump’s onetime trade adviser Peter Navarro hatched yet another wild conspiracy theory Sunday, claiming to Fox Business host Maria Bartiromo that Bill Barr, the former president’s own hand-picked attorney general, was part of a “deep state coup” against him.

It was difficult to follow Navarro’s reasoning. But he claimed that “Bill Barr, Donald Trump’s attorney general, actually turns out to be Joe Biden’s first attorney general.”

2. Scott Gottlieb suggests that vaccines will be available to almost everyone (in America) who wants them by the spring. If so, the economy should be booming by summer, regardless of whether there is fiscal stimulus or not.

Washington politicians are like generals fighting last war . . . er . . . last recession.

3. The NYT says the left doesn’t know how to deliver vaccines.

4. The NYT says that Democratic presidents do better in terms of both real GDP growth and job growth:

That’s true, but it’s not because of the economic policies pursued by Democratic administrations. To suggest otherwise is like saying that Tom Brady “beat” Aaron Rodgers in a game where Brady had a QB ranking of 73.8 despite facing no pass rush pressure while Rodgers had a rating of 101.6 despite dropped passes and an overwhelming pass rush from the Tampa Bay line.

And US presidents have far less effect on outcomes than do NFL QBs.

Trump is the worst president ever, but this fact has nothing to do with the fact that he’s dead last among post-1932 presidents in both jobs growth and RGDP growth.

5. Commenter “tpeach” directed me to a very good Atlantic article pointing out how the US government lies about China’s debt policies in the developing world:

The Chinese ‘Debt Trap’ Is a Myth

The narrative wrongfully portrays both Beijing and the developing countries it deals with.

Ironically, these false administration claims are the same sort of argument that used to be made by Marxist intellectuals when attacking the US. It was claimed that our international investment was “exploiting” third world countries. Sigh . . .

HT: Matt Yglesias